STAYING
FOCUSED




2008 ANNUAl REpORT
HOw DO YOU
   ACHIEvE CONSISTENT
        pERFORMANCE?

          HOw DO YOU
  SUCCEED IN CHANGING
   MARkET CONDITIONS?

R...
ElEctric
                                                 transmission &
                                                 ...
ND
                                                                                                 MN

OUR OpERATIONS
   ...
CENTERPOINT ENERGY            S&P 500 INDEX          S&P 500 UTILITIES INDEX

                                            ...
OUR BUSINESSES
           CONTINUE TO
         pERFORM wEll

   UNDER A
 vARIETY OF
    MARkET
CONDITIONS




     [left t...
DEAR
SHAREHOlDER,
2008 was an excellent year for your company.      CenterPoint Energy’s net income increased     Our earn...
Our natural gas distribution business         renewing contracts with key customers
had a good year with operating income ...
BoarD of DireCtors
  [front row, left to right]
  Robert T. O’Connell
  Derrill Cody
  Janiece M. longoria
  Milton Carrol...
eleCtriC transMission anD DistriBution


A CENTURY OF SERvICE;                    Our electric transmission and distributi...
2008 oPerating inCoMe




                                                                                                ...
OKLAHOMA
                                105,000




nuMBer of CustoMers Per state
at year enD


                         ...
natural gas DistriBution


AlIGNING THE INTERESTS
OF OUR COMpANY,

CUSTOMERS AND
THE ENvIRONMENT



Our natural gas distri...
interstate PiPelines


CApTURING
OppORTUNITIES,

BUIlDING
CONNECTIONS



Our interstate pipelines business
achieved its si...
1,538 BCF
                      2008




          1,216 BCF
              2007




                                  annu...
375 BCF
annual throughPut         2006




                                  398 BCF
                                    2...
421 BCF
  2008




For the sixth consecutive year,            We also increased compression by            Anadarko and Ark...
CoMPetitive natural gas
                                                                            sales anD serviCes


 ...
FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                                                                       Wa...
TABLE OF CONTENTS

                                                                                                       ...
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

   From time to time we make statements concerning our expecta...
PART I

Item 1. Business

                                                   OUR BUSINESS

Overview

  We are a public uti...
continue to be regulated by the Public Utility Commission of Texas (Texas Utility Commission). The legislation
provided fo...
CenterPoint Houston’s electric transmission business, along with those of other owners of transmission facilities
in Texas...
district court, (iii) affirmed the Texas Utility Commission’s rulings that denied recovery of approximately
$378 million r...
of appeals ordered that this issue be remanded to the Texas Utility Commission, as that commission requested. No
party, in...
that would allow the securitization of the remaining balance of the CTC, adjusted to refund certain unspent
environmental ...
Customers

   CenterPoint Houston serves nearly all of the Houston/Galveston metropolitan area. CenterPoint Houston’s
cust...
center- point energy annual reports 2008
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center- point energy annual reports 2008

  1. 1. STAYING FOCUSED 2008 ANNUAl REpORT
  2. 2. HOw DO YOU ACHIEvE CONSISTENT pERFORMANCE? HOw DO YOU SUCCEED IN CHANGING MARkET CONDITIONS? RIGHT STRATEGY. RIGHT ASSETS. CenterPoint Energy’s solid RIGHT pEOplE. performance is achieved by staying focused on our portfolio of electric and natural gas delivery businesses. As we continue to build and operate energy delivery systems to serve our customers today and tomorrow, we will strive toward our vision: to be recognized as America’s leading energy delivery company…and more.
  3. 3. ElEctric transmission & Distribution 2+ Million Metered Customers 5,000-Square-Mile Electric Service Territory In The Houston Area $545 Million Operating Income compEtitivE natural Gas natural Gas salEs Distribution & sErvicEs 3.2 Million Customers Marketed 528 Billion Cubic Feet In Arkansas, Louisiana, Of Natural Gas To Commercial, Minnesota, Mississippi, Industrial And Wholesale Oklahoma And Texas Customers In The Central THE STRENGTH $215 Million And Eastern United States Operating Income OF A BAlANCED $62 Million Operating Income pORTFOlIO intErstatE FiElD sErvicEs pipElinEs 3,600 Miles Of 8,000 Miles Of Pipe Gathering Lines Transported More Than Gathered 421 Billion Cubic Feet 1,500 Billion Cubic Feet Of Natural Gas In 2008 Of Natural Gas $147 Million In 2008 Operating Income $293 Million Plus $15 Million Equity Income Operating Income From A Jointly Owned Natural Gas Processing Plant CODE OF ETHICS The CenterPoint Energy Ethics and Compliance Code is based on our core values of INTEGRITY, ACCOUNTABILITY, INITIATIVE and RESPECT, and reflects the basic ethical principles that guide our conduct every day. Copies of our Ethics and Compliance Code are available in the Investors section of our Web site at CenterPointEnergy.com. pAGE 1
  4. 4. ND MN OUR OpERATIONS Large scale, domestic energy delivery company WI SD Attractive service territories and strategically MI located assets Geographic, economic IA and regulatory diversity NE Approximately 80% of IN IL operating income from regulated operations Predictable, stable KS earnings and cash flow MO Attractive dividend map KEY TN AR electric operations OK natural Gas operations Pipelines field services competitive natural Gas sales & services (includes all states shown) AL MS TX LA OUR pEOplE After the storm In the aftermath of Hurricane Ike, more than 90 percent of our more than 2 million customers were left without power. Working 16-hour shifts, over 11,000 skilled workers from around the country and Canada worked side-by-side with more than 5,000 of our employees to restore power to the greater Houston area in 18 days. The Edison Electric Institute (EEI) presented us with the EEI Emergency Recovery Award for our Hurricane Ike restoration efforts. We also received an EEI Emergency Assistance Award for helping other utilities following a 2007 ice storm in Oklahoma; Hurricane Dolly, which struck south Texas in 2008; and Hurricane Gustav, which hit Louisiana in 2008. In the communIty CenterPoint Energy and our employees contributed nearly $4.3 million for nonprofit organizations. Employees also volunteered approximately 166,000 hours in their communities.
  5. 5. CENTERPOINT ENERGY S&P 500 INDEX S&P 500 UTILITIES INDEX ME 300 250 VT NH 200 DOLLARS 150 MA 100 NY RI CT 50 STOCk pERFORMANCE GRApH 0 2002 2003 2004 2005 2006 20 Comparison of five-year cumulative total return among CenterPoint Energy, PA S&P 500 Index and S&P 500 Utilities Index for fiscal years ended December 31 NJ MD CenterPoint Energy S&P 500 Index S&P 500 Utilities Index OH DE 300 WV 250 200 VA DOLLARS 150 KY 100 NC 50 0 2003 2004 2005 2006 2007 2008 SC GA The graph illustrates the value on 12/31/08 of $100 invested in the common stock of CenterPoint Energy and each reference group on 12/31/03. The calculation of CenterPoint Energy’s total shareholder return assumes dividends were reinvested in company stock. Historical stock performance is not necessarily indicative of future performance. FINANCIAl HIGHlIGHTS FL YEAR ENDED DECEMBER 31 2008 2006 2007 IN MILLIONS OF DOLLARS (EXCEPT PER SHARE AMOUNTS) $ 11,322 reVenues $ 9,319 $ 9,623 1,273 Operating Income 1,045 1,185 447 Net Income 432 399 Per shAre of common stocK 1.33 Net Income, Basic 1.39 1.25 1.30 Net Income, Diluted 1.33 1.17 5.89 Book Value – Year End 4.96 5.61 12.62 Market Value – Year End 16.58 17.13 0.73 Common Dividend Paid 0.60 0.68 cAPItALIZAtIon 2,589 Transition Bonds (Includes Current Portion) 2,407 2,260 7,925 Other Long-Term Debt (Includes Current Portion) 6,593 7,419 2,037 Common Stock Equity 1,556 1,810 12,551 Total Capitalization (Includes Current Portion) 10,556 11,489 19,676 Total Assets 17,633 17,872 $ 1,053 Capital Expenditures $ 1,121 $ 1,011 346,089 Common Stock Outstanding (In Thousands) 313,652 322,719 47,405 Number of Common Shareholders (In Actual Numbers) 52,085 49,271 8,801 Number of Employees (In Actual Numbers) 8,623 8,568 pAGE 3
  6. 6. OUR BUSINESSES CONTINUE TO pERFORM wEll UNDER A vARIETY OF MARkET CONDITIONS [left to right] Milton Carroll Chairman David M. McClanahan president and CEO
  7. 7. DEAR SHAREHOlDER, 2008 was an excellent year for your company. CenterPoint Energy’s net income increased Our earnings were driven by the solid Our employees responded admirably in the by $48 million to $447 million, an increase performance of our businesses, which aftermath of Hurricane Ike, and in the face of 12 percent over 2007. Earnings per serve essential energy delivery needs of global economic turmoil and the upheaval share were $1.30 compared to $1.17 from of customers across the country. Each in the financial markets, our businesses the previous year. We raised our quarterly of our businesses overcame challenges delivered earnings significantly higher than common stock dividend by more than and executed their business plans very the previous year. Our diversified portfolio of 7 percent in 2008. In January 2009, well. Responding to these challenges also electric and natural gas delivery businesses we raised our quarterly dividend by helped us prepare for what lies ahead. continues to perform well under a variety of 4 percent, marking the fourth consecutive Our electric transmission and distribution market conditions. year we have raised our dividend since business, which serves more than 2 million emerging from our early transition years customers in the Houston area, overcame as an independent company. Our goal is to the impact of Hurricane Ike and increased return 50 to 75 percent of our sustainable core operating income from transmission earnings to shareholders each year. and distribution operations, reporting Despite our strong earnings, the decline $407 million compared to $400 million in in the stock market last year impacted 2007. Customer growth, warmer weather the value of CenterPoint Energy’s stock. and increased usage all drove last year’s While our total shareholder return last performance. Though Hurricane Ike dealt year was -22.5 percent, our performance a staggering blow to our service territory, was better than the overall stock market our employees rose to the challenge as as well as the S&P 500 Utilities Index. they always do. We restored electricity to most customers within two weeks and to all customers capable of receiving power within 18 days, a significant achievement of which we are quite proud. pAGE 5
  8. 8. Our natural gas distribution business renewing contracts with key customers had a good year with operating income of and capturing incremental revenue $215 million, a decline of only $3 million through ancillary services and system from the previous year’s record high of management. Our assets are strategically $218 million. Economic conditions, energy located in the mid-continent region where conservation and reduced usage offset new drilling techniques have stimulated MEETING ThE NATION’S ChANGING the benefits of customer growth and rate natural gas exploration and production, ENERGY DEMANDS increases. We continue to make progress providing us opportunities for further growth. With a new administration in Washington, toward decoupling natural gas rates to This same strong drilling activity also the focus of the nation’s energy policies separate our revenue from the volume drove record results for the sixth are expected to shift dramatically. Climate of natural gas sold. These progressive consecutive year for our field services change concerns are projected to drive rate designs allow us to actively promote business, which had operating income of initiatives to reduce carbon emissions conservation and energy efficiency and $147 million in 2008, an increase from and increase energy conservation. minimize the impact of reduced customer $99 million the previous year. We continued Many observers believe this will lead to use on our earnings, thereby aligning the to invest in gathering, processing and increased use of natural gas for power interests of our company with those of treating facilities, and for the third generation until clean coal technologies our customers. consecutive year, we connected more than are developed and more nuclear power Our interstate pipelines business reported 400 wells to our system. plants are built. Natural gas has the record results for the sixth consecutive lowest carbon footprint of any of the fossil Our competitive natural gas sales and year with $293 million in operating income, fuels. In the near term, we expect policy services business had a solid year, even an increase of 24 percent over 2007. makers to place an emphasis on energy though its $62 million in operating income In addition to bringing new pipelines conservation, because there is no better represented a decrease from $75 million in and capacity into service, we maximized way to reduce carbon emissions than 2007. The timing of mark-to-market losses the value of our core pipeline system by to use less energy. and inventory write-downs offset improved operating margins, increased natural gas We are well positioned to respond to these throughput, and significant growth in concerns in ways that will benefit both our revenues and customer count. customers and our shareholders. Energy- efficiency programs are not new to us. We have been helping our customers use energy more wisely for decades. For example, in Houston, through our ENERGY STAR new homes program, we have reduced electric demand by 130 megawatts over the last eight years. In Minnesota, our natural gas conservation improvement programs have reduced usage by 10.7 billion cubic feet over 16 years. The future is even more promising. In December 2008, we received approval to install more than 2 million advanced electric meters that have the potential to elevate energy conservation to a new level. Through these meters, information about offiCers [front row, left to right] David M. McClanahan Scott E. Rozzell Gary l. whitlock Thomas R. Standish [BaCk row, left to right] C. Gregory Harper Joseph B. McGoldrick James M. Dumler wayne D. Stinnett, Jr.
  9. 9. BoarD of DireCtors [front row, left to right] Robert T. O’Connell Derrill Cody Janiece M. longoria Milton Carroll David M. McClanahan Susan O. Rheney [BaCk row: left to right] peter S. wareing Sherman M. wolff O. Holcombe Crosswell Michael E. Shannon Thomas F. Madison Donald R. Campbell Michael p. Johnson ThE ChALLENGES fOR 2009 energy consumption and usage patterns We have worked hard to strengthen our will be made available to our customers. liquidity and cash flow to weather these As we write this letter, the country faces Pilot studies across the country indicate conditions, and we are closely managing considerable challenges. Financial markets substantial reductions in electricity usage our spending given these uncertain are in turmoil. The nation is in a recession are possible once consumers understand economic times. While we expect 2009 to that is expected to impact economic their usage on a real-time basis and are be challenging, we are well positioned and growth at least through this year and, given tools to respond. This new system are committed to the long-term growth of most likely, into 2010. Your company is not is expected to take five years to fully deploy your company. immune to the impact of these conditions. at an estimated cost of $640 million. We will Overall customer growth in our electric In closing, we once again want to thank recover our investment through a special and gas utilities service territories is our employees for their hard work and tariff that has been approved by the Public expected to be modest, at best, in 2009. dedication. We are extremely proud of their Utility Commission of Texas. Energy markets are also being impacted, outstanding efforts in 2008. Despite increased energy conservation, creating uncertainty about the timing of You can be assured that we will continue to demand for electricity and, therefore, the some projects. The steep decline in the work hard to earn your trust. We appreciate demand for clean natural gas, is expected stock market last year took its toll on the your confidence, and we will keep striving to increase. This will, in turn, drive the need value of the assets in our pension plans. to increase the value of your investment. for infrastructure to get new gas supplies As a result, non-cash pension expense to market. Some of the most prolific new will increase approximately $88 million, Sincerely, natural gas reserves are being produced pressuring our 2009 earnings. from unconventional sources in Arkansas, Louisiana, Oklahoma and Texas. Over the last several years, we have made record Milton Carroll investments in our gas gathering, processing Chairman and pipeline facilities and are well positioned to serve these new drilling areas and meet growing demand. We will continue to pursue new investment opportunities in and around our service territory. David M. McClanahan President and CEO pAGE 7
  10. 10. eleCtriC transMission anD DistriBution A CENTURY OF SERvICE; Our electric transmission and distribution business had a good year, in spite of INvESTING Hurricane Ike. We reported operating income of $545 million, consisting of IN THE FUTURE $407 million from the electric utility, $133 million related to transition bonds and $5 million from the competition transition charge. In 2008, we added nearly 31,000 customers, and we invested more than $330 million in new infrastructure to serve both our new and existing customers. We overcame the largest power outage in Texas history when Hurricane Ike hit the Houston-Galveston area in September. Our electric infrastructure held up well,
  11. 11. 2008 oPerating inCoMe ELECTRIC TRANSMISSION AND DISTRIBUTION OPERATIONS COMPETITION TRANSITION CHARGE TRANSITION BOND COMPANIES with less than 1 percent of our poles We have begun the implementation of conservation by giving Houston-area destroyed or needing to be replaced. leading-edge technology to dramatically electric consumers the ability to better Uprooted trees and flying debris, transform the way electricity is managed. monitor and manage their electric use however, damaged or severed power lines This is a critical step to move the electric and its cost in near real time. throughout our service territory causing grid into the digital age. We received Other environmentally friendly projects outages that affected more than 2 million, regulatory approval in December 2008 include supporting the installation of or 90 percent, of our customers and more to install more than 2 million advanced LED traffic signals in the City of Houston, than 3 million customers overall in Texas. meters over the next five years, beginning converting off-road vehicles such as With the help of 11,000 line mechanics and in March 2009, to meet the future needs forklifts to electric motors, and testing tree trimmers from 35 states and Canada, of the Texas restructured market place. plug-in hybrid electric vehicles. For the we safely restored service within 18 days This technology will provide the remote seventh consecutive year, we received and limited the loss of revenue to about capability for meter reading, connection the U.S. Environmental Protection $17 million. We are currently working and disconnection of service, and Agency’s ENERGY STAR Sustained within the regulatory process to recover customers’ operation of thermostats and Excellence Award. the estimated $600-650 million it cost other electric devices. These innovative to restore the system. meters should encourage greater energy pAGE 9
  12. 12. OKLAHOMA 105,000 nuMBer of CustoMers Per state at year enD LOUISIANA 251,000 ARKANSAS 445,000 MISSISSIPPI 122,000 MINNESOTA 798,000 TEXAS 1.5 MILLION
  13. 13. natural gas DistriBution AlIGNING THE INTERESTS OF OUR COMpANY, CUSTOMERS AND THE ENvIRONMENT Our natural gas distribution business We continue to seek approval by our reported operating income of $215 million, regulators of natural gas rates that a decline of only $3 million from 2007 minimize the impacts of weather record earnings. These results reflected and reduced customer use. These the impacts of the struggling economy, progressive rate designs support the reduced customer energy use and promotion of energy conservation volatile natural gas prices. Across our and better align the interests of our six-state service area, we added nearly company and our customers. As part 25,000 customers. of an overall settlement in our Texas Coast jurisdiction, we implemented a new annual cost-of-service adjustment mechanism, a concept we hope to implement in other jurisdictions. In Minnesota, as part of a $59.8 million rate request, we proposed a pilot program with a rate mechanism that separates the company’s revenue from the volume of natural gas sold. We expect the Minnesota Public Utilities Commission to make a final decision in January 2010. We also implemented a weather adjustment rate mechanism in Oklahoma. We continue to focus on increasing productivity and deploying new technologies to help us control costs and improve customer service. Finally, customers ranked us first in the Midwest Region in the J.D. Power and Associates 2008 Gas Utility Residential Customer Satisfaction StudySM, and customers in the South gave us significantly higher overall ratings than in 2007. pAGE 11
  14. 14. interstate PiPelines CApTURING OppORTUNITIES, BUIlDING CONNECTIONS Our interstate pipelines business achieved its sixth consecutive year of record earnings with operating income of $293 million in 2008. Drilling and production activity within our footprint continues to provide system expansion opportunities. Completion of the third phase of our 172-mile Carthage to Perryville pipeline in April 2008 brought its capacity to 1.5 billion cubic feet per day (Bcf/day). In September, gas began flowing through our 270-mile Southeast Supply Header, a joint venture with Spectra Energy that has capacity for 1 Bcf/day. Also, we recently completed our expansion projects and added the Cove, Bierne and Poteau compressor stations on existing pipelines. Overall, we increased throughput by more than 25 percent over 2007, and producer interest near our facilities remains high. We tailor our services to meet regulatory, customer and producer expectations, and we anticipate benefiting from improved planning and scheduling processes. We increased our ability to serve off-system customers located on the east side of our system, added new transportation and pooling services and are securing regulatory approvals while assessing customer interest for future expansions. We renewed a contract for an additional five years with one of our largest customers, Laclede Gas Company. Maintaining strong customer relationships is an important driver of business results, and we continue to be very pleased with our customer satisfaction and retention rates.
  15. 15. 1,538 BCF 2008 1,216 BCF 2007 annual throughPut 939 BCF 2006 pAGE 13
  16. 16. 375 BCF annual throughPut 2006 398 BCF 2007 fielD serviCes RECORD pERFORMANCE; pOSITIONED FOR GROwTH
  17. 17. 421 BCF 2008 For the sixth consecutive year, We also increased compression by Anadarko and ArkLaTex, and in Field Services had record performance 14 percent and throughput by 6 percent the unconventional shale areas of with operating income of $147 million to achieve a year-end throughput of Fayetteville, Haynesville and Woodford, plus equity income of $15 million 1.15 Bcf/day. We completed a number we are well positioned to continue from a jointly owned natural gas of new gathering and processing capturing growth opportunities. processing plant. projects, including a new 0.2 Bcf/day refrigeration plant. As a midstream natural gas gathering and processing provider, we added more than With operations in and around traditional 475 new well connections to our system. natural gas production basins of Arkoma, pAGE 15
  18. 18. CoMPetitive natural gas sales anD serviCes EXpANDING OUR pRESENCE, EXTENDING OUR SERvICES CustoMers we serve CenterPoint Energy Services, our competitive natural gas sales and services business, had a good year with operating income of $62 million. REAL ESTATE AND We have a strong presence in growing SMALL BUSINESS regions and markets, and we have a diverse portfolio of customers, such as utilities, health care, manufacturing and small businesses, including an orchid nursery (pictured) in the Midwest. Overall, we added more than 2,600 industrial and WHOLESALE AND commercial customers, including a group UTILITIES of commercial businesses in the Chicago area. This brings our total customer count to more than 9,700, an increase of 37 percent from the previous year. Extending our services within the bio-fuels industry, we now serve more than 30 bio-refining plants, including Poet, the largest ethanol producer in the U.S. We also are connecting new bio-methane MANUFACTURING plants that produce energy from animal waste and landfills. BIO-FUEL AND Well positioned to meet the natural gas AGRICULTURAL needs of current and future customers, we have more than 1 Bcf/day of firm transportation capacity and approximately HEALTH CARE 11 Bcf of underground storage capacity. We are accessing some of the most prolific shale production areas in the country to provide our customers with lower energy costs. GOVERNMENT AND INSTITUTIONAL pAGE 16
  19. 19. FORM 10-K
  20. 20. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ________________ Form 10-K (Mark One)  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2008 or  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __to Commission File Number 1-31447 ________________ CenterPoint Energy, Inc. (Exact name of registrant as specified in its charter) Texas 74-0694415 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 1111 Louisiana (713) 207-1111 (Registrant’s telephone number, including area code) Houston, Texas 77002 (Address and zip code of principal executive offices) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $0.01 par value and associated New York Stock Exchange rights to purchase preferred stock Chicago Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  No  Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  No  Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No  Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of each of the registrants’ knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10- K.  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of ―large accelerated filer‖, ―accelerated filer‖ and ―smaller reporting company‖ in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer  Accelerated filer  Non-accelerated filer  (Do not check if a smaller reporting company) Smaller reporting company  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No  The aggregate market value of the voting stock held by non-affiliates of CenterPoint Energy, Inc. (Company) was $5,451,652,076 as of June 30, 2008, using the definition of beneficial ownership contained in Rule 13d-3 promulgated pursuant to the Securities Exchange Act of 1934 and excluding shares held by directors and executive officers. As of February 13, 2009, the Company had 347,404,023 shares of Common Stock outstanding. Excluded from the number of shares of Common Stock outstanding are 166 shares held by the Company as treasury stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive proxy statement relating to the 2009 Annual Meeting of Shareholders of the Company, which will be filed with the Securities and Exchange Commission within 120 days of December 31, 2008, are incorporated by reference in Item 10, Item 11, Item 12, Item 13 and Item 14 of Part III of this Form 10-K.
  21. 21. TABLE OF CONTENTS Page PART I Item 1. Business ................................................................................................................................................................. 1 Item 1A. Risk Factors ........................................................................................................................................................... 21 Item 1B. Unresolved Staff Comments .................................................................................................................................. 31 Item 2. Properties ............................................................................................................................................................... 31 Item 3. Legal Proceedings .................................................................................................................................................. 32 Item 4. Submission of Matters to a Vote of Security Holders ............................................................................................ 32 PART II Item 5. Market for Registrants’ Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.............................................................................................................................................................. 33 Item 6. Selected Financial Data.......................................................................................................................................... 34 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations................................. 35 Item 7A. Quantitative and Qualitative Disclosures About Market Risk ............................................................................... 56 Item 8. Financial Statements and Supplementary Data ...................................................................................................... 59 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ................................ 104 Item 9A. Controls and Procedures ........................................................................................................................................ 104 PART III Item 10. Directors, Executive Officers and Corporate Governance ..................................................................................... 105 Item 11. Executive Compensation ....................................................................................................................................... 105 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .............. 105 Item 13. Certain Relationships and Related Transactions, and Director Independence ....................................................... 105 Item 14. Principal Accounting Fees and Services ................................................................................................................ 105 PART IV Item 15. Exhibits and Financial Statement Schedules.......................................................................................................... 105 i
  22. 22. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION From time to time we make statements concerning our expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are not historical facts. These statements are ―forward-looking statements‖ within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied by these statements. You can generally identify our forward-looking statements by the words ―anticipate,‖ ―believe,‖ ―continue,‖ ―could,‖ ―estimate,‖ ―expect,‖ ―forecast,‖ ―goal,‖ ―intend,‖ ―may,‖ ―objective,‖ ―plan,‖ ―potential,‖ ―predict,‖ ―projection,‖ ―should,‖ ―will‖ or other similar words. We have based our forward-looking statements on our management’s beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that assumptions, beliefs, expectations, intentions and projections about future events may and often do vary materially from actual results. Therefore, we cannot assure you that actual results will not differ materially from those expressed or implied by our forward-looking statements. Some of the factors that could cause actual results to differ from those expressed or implied by our forward- looking statements are described under ―Risk Factors‖ in Item 1A of this report. You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement. ii
  23. 23. PART I Item 1. Business OUR BUSINESS Overview We are a public utility holding company whose indirect wholly owned subsidiaries include: • CenterPoint Energy Houston Electric, LLC (CenterPoint Houston), which engages in the electric transmission and distribution business in a 5,000-square mile area of the Texas Gulf Coast that includes Houston; and • CenterPoint Energy Resources Corp. (CERC Corp. and, together with its subsidiaries, CERC), which owns and operates natural gas distribution systems in six states. Subsidiaries of CERC Corp. own interstate natural gas pipelines and gas gathering systems and provide various ancillary services. A wholly owned subsidiary of CERC Corp. offers variable and fixed-price physical natural gas supplies primarily to commercial and industrial customers and electric and gas utilities. Our reportable business segments are Electric Transmission & Distribution, Natural Gas Distribution, Competitive Natural Gas Sales and Services, Interstate Pipelines, Field Services and Other Operations. From time to time, we consider the acquisition or the disposition of assets or businesses. Our principal executive offices are located at 1111 Louisiana, Houston, Texas 77002 (telephone number: 713- 207-1111). We make available free of charge on our Internet website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such reports with, or furnish them to, the Securities and Exchange Commission (SEC). Additionally, we make available free of charge on our Internet website: • our Code of Ethics for our Chief Executive Officer and Senior Financial Officers; • our Ethics and Compliance Code; • our Corporate Governance Guidelines; and • the charters of our audit, compensation, finance and governance committees of the Board of Directors. Any shareholder who so requests may obtain a printed copy of any of these documents from us. Changes in or waivers of our Code of Ethics for our Chief Executive Officer and Senior Financial Officers and waivers of our Ethics and Compliance Code for directors or executive officers will be posted on our Internet website within five business days of such change or waiver and maintained for at least 12 months or reported on Item 5.05 of Form 8-K. Our website address is www.centerpointenergy.com. Except to the extent explicitly stated herein, documents and information on our website are not incorporated by reference herein. Electric Transmission & Distribution In 1999, the Texas legislature adopted the Texas Electric Choice Plan (Texas electric restructuring law) that led to the restructuring of certain integrated electric utilities operating within Texas. Pursuant to that legislation, integrated electric utilities operating within the Electric Reliability Council of Texas, Inc. (ERCOT) were required to unbundle their integrated operations into separate retail sales, power generation and transmission and distribution companies. The legislation also required that the prices for wholesale generation and retail electric sales be unregulated, but services by companies providing transmission and distribution service, such as CenterPoint Houston, would 1
  24. 24. continue to be regulated by the Public Utility Commission of Texas (Texas Utility Commission). The legislation provided for a transition period to move to the new market structure and provided a true-up mechanism for the formerly integrated electric utilities to recover stranded and certain other costs resulting from the transition to competition. Those costs are recoverable after approval by the Texas Utility Commission either through the issuance of securitization bonds or through the implementation of a competition transition charge (CTC) as a rider to the utility’s tariff. CenterPoint Houston is the only business of CenterPoint Energy that continues to engage in electric utility operations. It is a transmission and distribution electric utility that operates wholly within the state of Texas. Neither CenterPoint Houston nor any other subsidiary of CenterPoint Energy makes sales of electric energy at retail or wholesale, or owns or operates any electric generating facilities. Electric Transmission On behalf of retail electric providers (REPs), CenterPoint Houston delivers electricity from power plants to substations, from one substation to another and to retail electric customers taking power at or above 69 kilovolts (kV) in locations throughout CenterPoint Houston’s certificated service territory. CenterPoint Houston provides transmission services under tariffs approved by the Texas Utility Commission. Electric Distribution In ERCOT, end users purchase their electricity directly from certificated REPs. CenterPoint Houston delivers electricity for REPs in its certificated service area by carrying lower-voltage power from the substation to the retail electric customer. CenterPoint Houston’s distribution network receives electricity from the transmission grid through power distribution substations and delivers electricity to end users through distribution feeders. CenterPoint Houston’s operations include construction and maintenance of electric transmission and distribution facilities, metering services, outage response services and call center operations. CenterPoint Houston provides distribution services under tariffs approved by the Texas Utility Commission. Texas Utility Commission rules and market protocols govern the commercial operations of distribution companies and other market participants. Rates for these existing services are established pursuant to rate proceedings conducted before municipalities that have original jurisdiction and the Texas Utility Commission. ERCOT Market Framework CenterPoint Houston is a member of ERCOT. ERCOT serves as the regional reliability coordinating council for member electric power systems in Texas. ERCOT membership is open to consumer groups, investor and municipally-owned electric utilities, rural electric cooperatives, independent generators, power marketers and REPs. The ERCOT market includes most of the State of Texas, other than a portion of the panhandle, portions of the eastern part of the state bordering Louisiana and the area in and around El Paso. The ERCOT market represents approximately 85% of the demand for power in Texas and is one of the nation’s largest power markets. The ERCOT market includes an aggregate net generating capacity of approximately 73,000 megawatts (MW). There are only limited direct current interconnections between the ERCOT market and other power markets in the United States and Mexico. The ERCOT market operates under the reliability standards set by the North American Electric Reliability Council (NERC) and approved by the Federal Energy Regulatory Commission (FERC). These reliability standards are administered by the Texas Regional Entity (TRE), a functionally independent division of ERCOT. The Texas Utility Commission has primary jurisdiction over the ERCOT market to ensure the adequacy and reliability of electricity supply across the state’s main interconnected power transmission grid. The ERCOT independent system operator (ERCOT ISO) is responsible for operating the bulk electric power supply system in the ERCOT market. Its responsibilities include ensuring that electricity production and delivery are accurately accounted for among the generation resources and wholesale buyers and sellers. Unlike certain other regional power markets, the ERCOT market is not a centrally dispatched power pool, and the ERCOT ISO does not procure energy on behalf of its members other than to maintain the reliable operations of the transmission system. Members who sell and purchase power are responsible for contracting sales and purchases of power bilaterally. The ERCOT ISO also serves as agent for procuring ancillary services for those members who elect not to provide their own ancillary services. 2
  25. 25. CenterPoint Houston’s electric transmission business, along with those of other owners of transmission facilities in Texas, supports the operation of the ERCOT ISO. The transmission business has planning, design, construction, operation and maintenance responsibility for the portion of the transmission grid and for the load-serving substations it owns, primarily within its certificated area. CenterPoint Houston participates with the ERCOT ISO and other ERCOT utilities to plan, design, obtain regulatory approval for and construct new transmission lines necessary to increase bulk power transfer capability and to remove existing constraints on the ERCOT transmission grid. Recovery of True-Up Balance The Texas electric restructuring law substantially amended the regulatory structure governing electric utilities in order to allow retail competition for electric customers beginning in January 2002. The Texas electric restructuring law required the Texas Utility Commission to conduct a ―true-up‖ proceeding to determine CenterPoint Houston’s stranded costs and certain other costs resulting from the transition to a competitive retail electric market and to provide for its recovery of those costs. In March 2004, CenterPoint Houston filed its true-up application with the Texas Utility Commission, requesting recovery of $3.7 billion, excluding interest, as allowed under the Texas electric restructuring law. In December 2004, the Texas Utility Commission issued its final order (True-Up Order) allowing CenterPoint Houston to recover a true-up balance of approximately $2.3 billion, which included interest through August 31, 2004, and provided for adjustment of the amount to be recovered to include interest on the balance until recovery, along with the principal portion of additional excess mitigation credits (EMCs) returned to customers after August 31, 2004 and certain other adjustments. CenterPoint Houston and other parties filed appeals of the True-Up Order to a district court in Travis County, Texas. In August 2005, that court issued its judgment on the various appeals. In its judgment, the district court: • reversed the Texas Utility Commission’s ruling that had denied recovery of a portion of the capacity auction true-up amounts; • reversed the Texas Utility Commission’s ruling that precluded CenterPoint Houston from recovering the interest component of the EMCs paid to REPs; and • affirmed the True-Up Order in all other respects. The district court’s decision would have had the effect of restoring approximately $650 million, plus interest, of the $1.7 billion the Texas Utility Commission had disallowed from CenterPoint Houston’s initial request. CenterPoint Houston and other parties appealed the district court’s judgment to the Texas Third Court of Appeals, which issued its decision in December 2007. In its decision, the court of appeals: • reversed the district court’s judgment to the extent it restored the capacity auction true-up amounts; • reversed the district court’s judgment to the extent it upheld the Texas Utility Commission’s decision to allow CenterPoint Houston to recover EMCs paid to Reliant Energy, Inc. (RRI); • ordered that the tax normalization issue described below be remanded to the Texas Utility Commission as requested by the Texas Utility Commission; and • affirmed the district court’s judgment in all other respects. In April 2008, the court of appeals denied all motions for rehearing and reissued substantially the same opinion as it had rendered in December 2007. In June 2008, CenterPoint Houston petitioned the Texas Supreme Court for review of the court of appeals decision. In its petition, CenterPoint Houston seeks reversal of the parts of the court of appeals decision that (i) denied recovery of EMCs paid to RRI, (ii) denied recovery of the capacity auction true up amounts allowed by the 3
  26. 26. district court, (iii) affirmed the Texas Utility Commission’s rulings that denied recovery of approximately $378 million related to depreciation and (iv) affirmed the Texas Utility Commission’s refusal to permit CenterPoint Houston to utilize the partial stock valuation methodology for determining the market value of its former generation assets. Two other petitions for review were filed with the Texas Supreme Court by other parties to the appeal. In those petitions parties contend that (i) the Texas Utility Commission was without authority to fashion the methodology it used for valuing the former generation assets after it had determined that CenterPoint Houston could not use the partial stock valuation method, (ii) in fashioning the method it used for valuing the former generating assets, the Texas Utility Commission deprived parties of their due process rights and an opportunity to be heard, (iii) the net book value of the generating assets should have been adjusted downward due to the impact of a purchase option that had been granted to RRI, (iv) CenterPoint Houston should not have been permitted to recover construction work in progress balances without proving those amounts in the manner required by law and (v) the Texas Utility Commission was without authority to award interest on the capacity auction true up award. Review by the Texas Supreme Court of the court of appeals decision is at the discretion of the court. In November 2008, the Texas Supreme Court requested the parties to the Petitions for Review to submit briefs on the merits of the issues raised. Briefing at the Texas Supreme Court should be completed in the second quarter of 2009. Although the Texas Supreme Court has not indicated whether it will grant review of the lower court’s decision, its request for full briefing on the merits allowed the parties to more fully explain their positions. There is no prescribed time in which the Texas Supreme Court must determine whether to grant review or, if review is granted, for a decision by that court. Although we and CenterPoint Houston believe that CenterPoint Houston’s true-up request is consistent with applicable statutes and regulations and, accordingly, that it is reasonably possible that it will be successful in its appeal to the Texas Supreme Court, we can provide no assurance as to the ultimate court rulings on the issues to be considered in the appeal or with respect to the ultimate decision by the Texas Utility Commission on the tax normalization issue described below. To reflect the impact of the True-Up Order, in 2004 and 2005, we recorded a net after-tax extraordinary loss of $947 million. No amounts related to the district court’s judgment or the decision of the court of appeals have been recorded in our consolidated financial statements. However, if the court of appeals decision is not reversed or modified as a result of further review by the Texas Supreme Court, we anticipate that we would be required to record an additional loss to reflect the court of appeals decision. The amount of that loss would depend on several factors, including ultimate resolution of the tax normalization issue described below and the calculation of interest on any amounts CenterPoint Houston ultimately is authorized to recover or is required to refund beyond the amounts recorded based on the True-up Order, but could range from $170 million to $385 million (pre-tax) plus interest subsequent to December 31, 2008. In the True-Up Order, the Texas Utility Commission reduced CenterPoint Houston’s stranded cost recovery by approximately $146 million, which was included in the extraordinary loss discussed above, for the present value of certain deferred tax benefits associated with its former electric generation assets. We believe that the Texas Utility Commission based its order on proposed regulations issued by the Internal Revenue Service (IRS) in March 2003 that would have allowed utilities owning assets that were deregulated before March 4, 2003 to make a retroactive election to pass the benefits of Accumulated Deferred Investment Tax Credits (ADITC) and Excess Deferred Federal Income Taxes (EDFIT) back to customers. However, the IRS subsequently withdrew those proposed normalization regulations and in March 2008 adopted final regulations that would not permit utilities like CenterPoint Houston to pass the tax benefits back to customers without creating normalization violations. In addition, we received a Private Letter Ruling (PLR) from the IRS in August 2007, prior to adoption of the final regulations that confirmed that the Texas Utility Commission’s order reducing CenterPoint Houston’s stranded cost recovery by $146 million for ADITC and EDFIT would cause normalization violations with respect to the ADITC and EDFIT. If the Texas Utility Commission’s order relating to the ADITC reduction is not reversed or otherwise modified on remand so as to eliminate the normalization violation, the IRS could require us to pay an amount equal to CenterPoint Houston’s unamortized ADITC balance as of the date that the normalization violation is deemed to have occurred. In addition, the IRS could deny CenterPoint Houston the ability to elect accelerated tax depreciation benefits beginning in the taxable year that the normalization violation is deemed to have occurred. Such treatment, if required by the IRS, could have a material adverse impact on our results of operations, financial condition and cash flows in addition to any potential loss resulting from final resolution of the True-Up Order. In its opinion, the court 4
  27. 27. of appeals ordered that this issue be remanded to the Texas Utility Commission, as that commission requested. No party, in the petitions for review or briefs filed with the Texas Supreme Court, has challenged that order by the court of appeals, though the Texas Supreme Court, if it grants review, will have authority to consider all aspects of the rulings above, not just those challenged specifically by the appellants. We and CenterPoint Houston will continue to pursue a favorable resolution of this issue through the appellate or administrative process. Although the Texas Utility Commission has not previously required a company subject to its jurisdiction to take action that would result in a normalization violation, no prediction can be made as to the ultimate action the Texas Utility Commission may take on this issue on remand. The Texas electric restructuring law allowed the amounts awarded to CenterPoint Houston in the Texas Utility Commission’s True-Up Order to be recovered either through securitization or through implementation of a CTC or both. Pursuant to a financing order issued by the Texas Utility Commission in March 2005 and affirmed by a Travis County district court, in December 2005 a subsidiary of CenterPoint Houston issued $1.85 billion in transition bonds with interest rates ranging from 4.84% to 5.30% and final maturity dates ranging from February 2011 to August 2020. Through issuance of the transition bonds, CenterPoint Houston recovered approximately $1.7 billion of the true-up balance determined in the True-Up Order plus interest through the date on which the bonds were issued. In July 2005, CenterPoint Houston received an order from the Texas Utility Commission allowing it to implement a CTC designed to collect the remaining $596 million from the True-Up Order over 14 years plus interest at an annual rate of 11.075% (CTC Order). The CTC Order authorized CenterPoint Houston to impose a charge on REPs to recover the portion of the true-up balance not recovered through a financing order. The CTC Order also allowed CenterPoint Houston to collect approximately $24 million of rate case expenses over three years without a return through a separate tariff rider (Rider RCE). CenterPoint Houston implemented the CTC and Rider RCE effective September 13, 2005 and began recovering approximately $620 million. The return on the CTC portion of the true-up balance was included in CenterPoint Houston’s tariff-based revenues beginning September 13, 2005. Effective August 1, 2006, the interest rate on the unrecovered balance of the CTC was reduced from 11.075% to 8.06% pursuant to a revised rule adopted by the Texas Utility Commission in June 2006. Recovery of rate case expenses under Rider RCE was completed in September 2008. Certain parties appealed the CTC Order to a district court in Travis County. In May 2006, the district court issued a judgment reversing the CTC Order in three respects. First, the court ruled that the Texas Utility Commission had improperly relied on provisions of its rule dealing with the interest rate applicable to CTC amounts. The district court reached that conclusion based on its belief that the Texas Supreme Court had previously invalidated that entire section of the rule. The 11.075% interest rate in question was applicable from the implementation of the CTC Order on September 13, 2005 until August 1, 2006, the effective date of the implementation of a new CTC in compliance with the revised rule discussed above. Second, the district court reversed the Texas Utility Commission’s ruling that allows CenterPoint Houston to recover through the Rider RCE the costs (approximately $5 million) for a panel appointed by the Texas Utility Commission in connection with the valuation of electric generation assets. Finally, the district court accepted the contention of one party that the CTC should not be allocated to retail customers that have switched to new on-site generation. The Texas Utility Commission and CenterPoint Houston appealed the district court’s judgment to the Texas Third Court of Appeals, and in July 2008, the court of appeals reversed the district court’s judgment in all respects and affirmed the Texas Utility Commission’s order. Two of the appellants have requested further review from the Texas Supreme Court. The ultimate outcome of this matter cannot be predicted at this time. However, the Company does not expect the disposition of this matter to have a material adverse effect on our or CenterPoint Houston’s financial condition, results of operations or cash flows. During the years ended December 31, 2006, 2007 and 2008, CenterPoint Houston recognized approximately $55 million, $42 million and $5 million, respectively, in operating income from the CTC. Additionally, during the years ended December 31, 2006, 2007 and 2008, CenterPoint Houston recognized approximately $13 million, $14 million and $13 million, respectively, of the allowed equity return not previously recognized. As of December 31, 2008, we have not recognized an allowed equity return of $207 million on CenterPoint Houston’s true-up balance because such return will be recognized as it is recovered in rates. During the 2007 legislative session, the Texas legislature amended statutes prescribing the types of true-up balances that can be securitized by utilities and authorized the issuance of transition bonds to recover the balance of the CTC. In June 2007, CenterPoint Houston filed a request with the Texas Utility Commission for a financing order 5
  28. 28. that would allow the securitization of the remaining balance of the CTC, adjusted to refund certain unspent environmental retrofit costs and to recover the amount of the final fuel reconciliation settlement. CenterPoint Houston reached substantial agreement with other parties to this proceeding, and a financing order was approved by the Texas Utility Commission in September 2007. In February 2008, pursuant to the financing order, a new special purpose subsidiary of CenterPoint Houston issued approximately $488 million of transition bonds in two tranches with interest rates of 4.192% and 5.234% and final maturity dates of February 2020 and February 2023, respectively. Contemporaneously with the issuance of those bonds, the CTC was terminated and a transition charge was implemented. Hurricane Ike CenterPoint Houston’s electric delivery system suffered substantial damage as a result of Hurricane Ike, which struck the upper Texas coast early Saturday, September 13, 2008. The strong Category 2 storm initially left more than 90% of CenterPoint Houston’s more than 2 million metered customers without power, the largest outage in CenterPoint Houston’s 130-year history. Most of the widespread power outages were due to power lines damaged by downed trees and debris blown by Hurricane Ike’s winds. In addition, on Galveston Island and along the coastal areas of the Gulf of Mexico and Galveston Bay, the storm surge and flooding from rains accompanying the storm caused significant damage or destruction of houses and businesses served by CenterPoint Houston. CenterPoint Houston estimates that total costs to restore the electric delivery facilities damaged as a result of Hurricane Ike will be in the range of $600 million to $650 million. As is common with electric utilities serving coastal regions, the poles, towers, wires, street lights and pole mounted equipment that comprise CenterPoint Houston’s transmission and distribution system are not covered by property insurance, but office buildings and warehouses and their contents and substations are covered by insurance that provides for a maximum deductible of $10 million. Current estimates are that total losses to property covered by this insurance were approximately $17 million. In addition to storm restoration costs, CenterPoint Houston lost approximately $17 million in revenue through December 31, 2008. Within the first 18 days after the storm, CenterPoint Houston had restored power to all customers capable of receiving it. CenterPoint Houston has deferred the uninsured storm restoration costs as management believes it is probable that such costs will be recovered through the regulatory process. As a result, storm restoration costs did not affect our or CenterPoint Houston’s reported net income for 2008. As of December 31, 2008, CenterPoint Houston recorded an increase of $145 million in construction work in progress and $435 million in regulatory assets for restoration costs incurred through December 31, 2008. Approximately $73 million of these costs are based on estimates and are included in accounts payable as of December 31, 2008. Additional restoration costs will continue to be incurred in 2009. Assuming necessary enabling legislation is enacted by the Texas Legislature in the session that began in January 2009, CenterPoint Houston expects to seek a financing order from the Texas Utility Commission to obtain recovery of its storm restoration costs through the issuance of non-recourse securitization bonds similar to the storm recovery bonds issued by another Texas utility following the hurricanes that affected that utility’s service territories in 2005. Assuming those bonds are issued, CenterPoint Houston will recover the amount of storm restoration costs determined by the Texas Utility Commission to have been prudently incurred out of the bond proceeds, with the bonds being repaid over time through a charge imposed on customers. Alternatively, if securitization is not available, recovery of those costs would be sought through traditional regulatory mechanisms. Under its 2006 rate case settlement, CenterPoint Houston is entitled to seek an adjustment to rates in this situation, even though in most instances its rates are frozen until 2010. 6
  29. 29. Customers CenterPoint Houston serves nearly all of the Houston/Galveston metropolitan area. CenterPoint Houston’s customers consist of 79 REPs, which sell electricity to over 2 million metered customers in CenterPoint Houston’s certificated service area, and municipalities, electric cooperatives and other distribution companies located outside CenterPoint Houston’s certificated service area. Each REP is licensed by, and must meet minimal creditworthiness criteria established by, the Texas Utility Commission. Two of the REPs in CenterPoint Houston’s service area are subsidiaries of RRI. Sales to subsidiaries of RRI represented approximately 56%, 51% and 48% of CenterPoint Houston’s transmission and distribution revenues in 2006, 2007 and 2008, respectively. CenterPoint Houston’s billed receivables balance from REPs as of December 31, 2008 was $141 million. Approximately 46% of this amount was owed by subsidiaries of RRI. CenterPoint Houston does not have long-term contracts with any of its customers. It operates on a continuous billing cycle, with meter readings being conducted and invoices being distributed to REPs each business day. Advanced Metering System and Distribution Automation (Intelligent Grid) In December 2008, CenterPoint Houston received approval from the Texas Utility Commission to deploy an advanced metering system (AMS) across its service territory over the next five years. CenterPoint Houston plans to begin installing advanced meters in March 2009. This innovative technology should encourage greater energy conservation by giving Houston-area electric consumers the ability to better monitor and manage their electric use and its cost in near real time. CenterPoint Houston will recover the cost for the AMS through a monthly surcharge to all REPs over 12 years. The surcharge for each residential consumer for the first 24 months, beginning in February 2009, will be $3.24 per month; thereafter, the surcharge is scheduled to be reduced to $3.05 per month. These amounts are subject to upward or downward adjustment in future proceedings to reflect actual costs incurred and to address required changes in scope. CenterPoint Houston projects capital expenditures of approximately $640 million for the installation of the advanced meters and corresponding communication and data management systems over the five-year deployment period. CenterPoint Houston is also pursuing possible deployment of an electric distribution grid automation strategy that involves the implementation of an ―Intelligent Grid‖ which would make use of CenterPoint Houston’s facilities to provide on-demand data and information about the status of facilities on its system. Although this technology is still in the developmental stage, CenterPoint Houston believes it has the potential to provide a significant improvement in grid planning, operations and maintenance of the CenterPoint Houston distribution system. These improvements would be expected to contribute to fewer and shorter outages, better customer service, improved operations costs, improved security and more effective use of our workforce. Texas Utility Commission approval and appropriate rate treatment would be sought in connection with any actual deployment of this technology. Competition There are no other electric transmission and distribution utilities in CenterPoint Houston’s service area. In order for another provider of transmission and distribution services to provide such services in CenterPoint Houston’s territory, it would be required to obtain a certificate of convenience and necessity from the Texas Utility Commission and, depending on the location of the facilities, may also be required to obtain franchises from one or more municipalities. We know of no other party intending to enter this business in CenterPoint Houston’s service area at this time. Seasonality A significant portion of CenterPoint Houston’s revenues is derived from rates that it collects from each REP based on the amount of electricity it delivers on behalf of such REP. Thus, CenterPoint Houston’s revenues and results of operations are subject to seasonality, weather conditions and other changes in electricity usage, with revenues being higher during the warmer months. Properties All of CenterPoint Houston’s properties are located in Texas. Its properties consist primarily of high voltage electric transmission lines and poles, distribution lines, substations, service wires and meters. Most of CenterPoint 7

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